Understanding Bankruptcy and How to Avoid It

When confronted with a serious debt problem and financial crisis, a person or a business owner may consider filing for bankruptcy. This option gives a debtor the chance to be discharged from all debts through Chapter 7 Bankruptcy.

However, not everyone who files for bankruptcy can qualify for a Chapter 7 Bankruptcy. If the bankruptcy court finds that the debtor is capable of repayment, he/she will be subjected to a five-year repayment plan where a percentage of the monthly salary will be automatically paid to creditors. This is known as Chapter 13 Bankruptcy.

Chapter 7 and Chapter 13 are just the two basic types of bankruptcies but there are other forms as well. It’s important to understand that not all debts can be discharged through bankruptcy. Examples of these debts include alimony, most student loans, and tax liens. It is the bankruptcy court that decides which type of bankruptcy is best appropriate for the applicant’s financial situation.

Under the new bankruptcy law, an applicant must go through the “median income means” test in order to determine if he/she is eligible for a Chapter 7 bankruptcy. If your monthly income shows that you are capable for debt repayment, after all necessary expenses have been deducted, you will be subjected to a Chapter 13 Bankruptcy.

How to Avoid Bankruptcy

Filing for bankruptcy can sometimes be the only practical solution to debt problem. However, in many instances, you can take other solutions to recover from debt and bad credit. Keep in mind that a record of bankruptcy will remain in your personal credit report for seven years. Once your debts have been discharged through bankruptcy, all past credit history you built will be erased.

The consequences of having a bankruptcy record in your credit history can be serious. It can be more difficult to get approved for new credit since creditors may regard you as a high risk customer. This is why borrowers need to carefully consider the matter, before deciding whether filing for bankruptcy is suitable.

Of course, the best way to avoid bankruptcy is to avoid bad debt. As the popular adage goes, an ounce of prevention is better than a pound of cure. If you own a credit card or credit cards, you should be aware of the risks if you fail to manage your spending. It is crucial to pay off your debts on time to avoid build-up.

If you can keep your debts as minimal as possible, you can greatly minimize the risk of bad debt and bankruptcy. Be aware of your duties and responsibilities as a borrower. Once you acquired credit, you should comply by the terms and conditions of your lender.

Indeed, effective money management is the key to avoid bankruptcy. Live within your means and recognize the value of hard-earned money. Before acquiring a loan or a credit card, weigh the pros and cons before you make a decision. And if you really need to obtain a loan or a new credit card, shop around first to find the best deal.

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